Good morning! It appears that the bull market has hit a pause, with the last six trading days showing sluggishness. Mark Hackett of Nationwide believes that the S&P 500 has exhausted its technical support and will need stronger fundamentals to continue rising. What are your thoughts on this? Share your views with us at [email protected] and [email protected].
Now, let’s shift our focus to Russia’s recent events. The uprising led by Yevgeny Prigozhin’s Wagner militia against the Russian government has been a significant geopolitical event. It has highlighted the vulnerability of Vladimir Putin’s regime, given that the uprising came close to Moscow without facing much resistance. Additionally, Prigozhin criticized the Russian military leadership for their incompetence and dishonesty. Surprisingly, instead of prosecution or death, Prigozhin and his men have received a settlement offer. All of this suggests fear and disorder within Putin’s camp. While the implications for the Ukraine war remain uncertain, the likelihood of regime change in Russia has increased, although still low. Despite the geopolitical significance of these events, global markets did not react significantly. Does this indicate that the events were financially irrelevant or that their market implications are too difficult to estimate?
There were some noticeable market movements. Shares of military contractors in Europe and the US declined, as investors speculated that political instability in Russia could impede the Kremlin’s war effort and potentially shorten the conflict in Ukraine. On the other hand, energy stocks, particularly US majors, performed well even with relatively unchanged oil prices. This may reflect a belief that Russian instability will limit global energy supply. However, it’s worth noting that these market moves were somewhat contradictory, with lower stock prices for defense companies suggesting stability and higher oil prices indicating instability.
Joachim Klement, a strategist at Liberum, argues that the weekend’s events hold little significance for financial markets. According to him, only three things related to the Ukraine war will matter to investors: (a) Russian nuclear escalation, (b) the end of Western support for Ukraine, or (c) Russian regime change. Klement believes that the chances of (a) and (b) occurring are slim, and (c) is impossible to estimate. Therefore, he suggests that investors should continue with their usual strategies. However, his argument is interesting because it indicates that the events do have implications for the markets, but their exact outcomes are uncertain.
Deep uncertainty doesn’t necessarily mean investors should remain inactive. While the most likely outcome may remain unchanged, the tails of the probability distribution (the chances of things getting significantly worse or better) might have widened. This suggests that investors should reduce their exposure, unless their risk budgets have increased.
Geopolitical strategist Marko Papic agrees with Klement’s view that the weekend’s events don’t offer much for investors to trade. He believes that Putin’s invasion of Ukraine has significantly weakened him, making it more likely for him to give up his ambitions and focus on stabilizing Russia domestically. Although this would reduce geopolitical risks, Papic doesn’t see enough risk premium in relevant markets to justify betting on a de-escalation. He suggests that long-dated volatility in oil markets might be a way to trade the underpriced risk of bad news from Russia.
In conclusion, it is possible to believe that the recent events in Russia are important for markets while also understanding why there was no immediate market reaction. The implications are complex, making it difficult to determine consensus trades. However, a more unstable Russia has significant short and long-term implications for the markets and should not be overlooked simply because it didn’t immediately impact prices.
Moving on, let’s address the suggestion that the falling yen is behind Japan’s rally. While the weak yen may have positively impacted Japanese exporters’ earnings, there are other factors at play. The Japanese composite PMI survey, which measures output, shows a slight correlation with the yen’s strength. However, this correlation is not strong enough to suggest that the weak yen is the primary driver of recent economic acceleration.
Alternatively, domestic demand seems to be a more fitting explanation. Nominal wages have increased, and inflation has become more evident, encouraging spending. Additionally, since Japan reopened to foreign visitors, tourism has boosted demand. This explanation aligns better with recent economic data, as Japanese GDP grew by 2.7% in the first quarter. While manufacturing PMIs show mild contraction, services PMIs have seen significant improvement. These factors indicate that private demand is driving the economy, rather than a weak yen propelling exports.
In conclusion, while the weak yen may have contributed to Japanese exporters’ earnings, recent economic acceleration seems to be primarily driven by domestic demand. The correlation between the yen and economic performance is not strong enough to attribute the rally solely to currency depreciation.
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